Navigating Talent Hot Spots

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Executive Summary

Innovation clusters like San Francisco and Boston have long had an outsize impact on the global economy, and their influence keeps growing. In 2017, for instance, America’s 10 largest tech hubs accounted for 58% of U.S. patents. Globally, cities such as Tokyo, Paris, Beijing, Shenzhen, and Seoul produced a similar proportion. The increased geographic concentration of innovation activity poses a challenge for firms based in suburban industrial parks. To stay relevant, they need to tap into urban hotbeds, but setting up operations there can be extremely expensive.

In his work on global talent flows, Harvard Business School’s Kerr has seen organizations try three solutions: At one extreme, they can relocate their headquarters to a hub, as GE recently did (but make them much smaller). A less expensive strategy is to create an innovation lab or corporate outpost in a talent cluster, as Walmart did with Walmart Labs. The most conservative strategy is to run executive retreats and immersions in talent clusters—a tactic Vodafone uses effectively.

These three options aren’t mutually exclusive. Given the need to stay in touch with multiple clusters, companies may want to try them all. Each one involves substantial risks that executives must manage. But together they offer a good playbook to firms that are finding themselves outside the action as the clout of a handful of cities grows.

Idea in Brief

The Shift

Leading cities have long had an outsize influence on the global economy, but today the impact that top talent clusters such as Boston and San Francisco have on innovation is especially pronounced.

The Challenge

Urban innovation hubs are extraordinarily expensive. How can companies harness the benefits of their dense pools of knowledge and skills in the most effective manner?

The Solution

Companies have three options: Relocate their headquarters to hubs; set up innovation labs or corporate outposts there; or run executive retreats and immersions there.

In 2016, General Electric announced that it was moving its longtime corporate headquarters from suburban Fairfield, Connecticut, to downtown Boston. The company felt it needed to plug in to Boston’s high-tech young ventures and talent to become more innovative and digital—and ensure that it would be on the forefront of any emerging disruptive technologies. Jeff Bornstein, then the CFO, summed up the advantage of Boston to the Wall Street Journal this way: “I can walk out my door and visit four start-ups. In Fairfield I couldn’t even walk out my door and get a sandwich.”

Leading cities have long had an outsize influence on the global economy, but today the impact that top talent clusters like Boston and San Francisco have on innovation is especially pronounced. In 2017, America’s 10 largest tech hubs accounted for 58% of U.S. patents. Globally, cities such as Tokyo, Paris, Beijing, Shenzhen, and Seoul produced a similarly large proportion. The increased clout of these hubs poses a dilemma for companies that have historically located their leadership and talent in suburban industrial parks. Having a presence in innovation hotbeds is crucial, but it’s also extraordinarily expensive—especially in the narrow innovation districts within cities where most of the hightech activity takes place.

How can companies most effectively harness the benefits of these urban pools of knowledge and skills? In my work on global talent flows, I’ve seen corporations take three core approaches: At one extreme, they relocate their headquarters, just as GE did. A less expensive and more easily reversible way to establish a brick-and-mortar foothold is to set up an innovation lab or corporate outpost in a talent cluster. The most conservative option is to organize executive retreats and immersive visits there.

The three options are not mutually exclusive—especially since companies often need to keep in touch with several clusters—and each one involves substantial risks. But as the influence of a handful of global cities continues to grow, these approaches offer a playbook to companies that find themselves outside the action in today’s concentrated innovation geography.

Option #1: Headquarters Moves

While we tend to associate innovation hubs with entrepreneurs and start-ups, increasingly they’re the domain of incumbents, too. Twenty years ago inventors working in the top 10 cities for patenting activity accounted for fewer than half the patents filed by America’s 50 largest companies; their innovations were developed mostly in corporate labs in smaller cities. In 2017, by contrast, inventors working in the top 10 cities accounted for almost 70% of the Fortune 50’s patent filings. Corporations have gone from being underrepresented in tech hubs to exceeding the national average.

To some extent, this shift reflects the displacement of legacy companies in the Fortune 50 by innovative firms such as Alphabet and Amazon. But other incumbents besides GE are moving resources to tech hubs. In 2016 packaged foods manufacturer Conagra, for instance, relocated its headquarters from Omaha, Nebraska, to Chicago in order to attract more Millennials and recruit senior talent with experience in consumer brands. While he praised Omaha, CEO Sean Connolly told the Omaha World-Herald, “Chicago is an environment that offers us access to innovation and brand-building talent.”

Though cross-state moves grab headlines, companies are also migrating out of less-dense areas surrounding talent clusters and into urban centers. In Boston, organizations relocating to the downtown area include Reebok, Converse, and much of the local venture capital industry. A local recruiting agency, WinterWyman, has reported that downtown Boston and Cambridge accounted for more than 60% of recent tech hires in the metropolitan area, compared with just 5% two decades ago. Conagra closed a suburban Chicago facility so that it could move more of its executive team into its downtown HQ. McDonald’s, Motorola Solutions, Kraft Heinz, and some 50 other companies have also relocated to downtown Chicago from nearby suburbs. Greg Brown, the CEO of Motorola, noted that its HQ move would accelerate cultural change in the company and make recruiting software developers and data scientists easier.

The increased access to talent can be substantial, since the share of the local college-educated workforce engaged in digital fields in hub cities is typically two to three times as high as the national average. Moreover, many talented young people want to work in hip downtown locations with sleek new offices, not aging suburban complexes with lots of parking.

But a headquarters relocation poses several risks. For large incumbents it can be incredibly difficult, time-consuming, and expensive. The need to uproot an existing workforce, change legacy customer locations, and establish new local political connections and responsibilities means that any relocation will be disruptive, offsetting the advantages a talent cluster might offer. What’s more, HQ moves are hard to reverse. Because talent hot spots can rise and fall—in the 1950s, Silicon Valley was barely a dot on the economic map, and Detroit was the epicenter of rapidly growing industry—corporations may end up overinvesting in a temporary competitive advantage.

One way to mitigate that risk is to build smaller headquarters that are focused on innovation and the key needs of top decision makers. GE is moving fewer than 800 people (out of a workforce of more than 300,000) to Boston; only those who are especially focused on innovation and digitization are being relocated. At some incumbents the top leaders already work mostly remotely, especially if they have heavy travel schedules. New corporate HQs are starting to look and operate more like the offices of unicorn start-ups than of industrial giants. Communication technologies and connectivity allow corporate leadership to oversee operations with ever greater scope and scale from a small command post.

This points to the second broad risk with headquarters moves: that ideas generated within the talent hub may fail to spread to the rest of the organization. Cutting-edge concepts picked up in Boston or Berlin will benefit a global company only if they improve the productivity of operations around the world. Moving key executives to talent clusters may distance leaders from other employees in the firm, whereas the older corporate HQs in suburban office parks tended to minimize internal distances. As a result, careful thought will have to go into diffusing acquired knowledge throughout the organization’s facilities.

Talent rotations can mitigate this risk. A study of an Indian R&D center at a leading multinational showed that short business trips to the firm’s U.S. headquarters boosted the productivity of the site’s scientists and engineers upon their return home, because they had gained technical knowledge and formed tighter personal relationships with leaders at headquarters and were better able to match people’s skills to assignments. And as more companies are learning, communication technology is not a substitute for people flows but a complement. Yes, great videoconferencing technology helps, but there’s no better way than meeting in person to kick off or renew a relationship.

A third risk is negative press and the loss of political capital. No city wants a leading firm to leave, but the potential for ill will extends to new locations, too. Many companies seek tax breaks and other incentives for their new headquarters; it’s a delicate balancing act to secure preferential treatment but also be perceived as a partner in the new home city. Amazon has been criticized for the multiround bidding contest it held and the incentives it sought when scouting sites for its second North American headquarters. As Apple began its search for the site of a fourth U.S. campus, CEO Tim Cook remarked that his company would not hold a beauty pageant like Amazon’s. “That’s not Apple,” he told Recode.

Headquarters moves must also deliver on high expectations. They must weather any changes in corporate leadership and the ups and downs of company performance. Shortly after John Flannery took over as CEO of GE, in 2017, the company announced that it would delay construction on its new $200 million building in Boston. And after GE announced job cuts, some of which would affect Boston workers, last fall, a local newspaper columnist wondered, “Was Boston sold a lemon”? GE remains committed to its new HQ but is also rethinking the role of the HQ as it works to realign itself.

A fourth risk that companies must guard against is a “leaky bucket.” Although they can recruit more easily in hubs, they can see ideas and talent flow out, too. In top clusters being an attractive local employer often means stacking up well against an Apple or a Spotify with competitive salaries and benefits.

Finally, there’s a risk of unintended and unforeseen consequences. Research shows that companies are more likely to close plants that are distant from HQs than plants close by, for instance. Headquarters moves permanently shift the internal workings of a firm in material ways. The company will also adopt more of the culture of the new home base—which was often the point of the move, after all—and executives will have a new peer group going forward. But for executives and directors looking to deeply transform their organizations, all those risks may be warranted.

Option #2: Creating Outposts and Innovation Labs

At many companies, moving the headquarters is not up for discussion. In September 2017, the same month that Amazon began its search for a second North American headquarters, Walmart announced the construction of a new head office in its longtime home of Bentonville, Arkansas. But even if Walmart remains forever rooted in Arkansas, it has no intention of ceding the battle for the insights of talent clusters to the likes of Amazon (Seattle) and Alibaba (Hangzhou). Walmart Labs, opened in 2011 in Silicon Valley, focuses on making advances, ranging from voice-enabled shopping to crowdsourced delivery, on the frontiers of e-commerce.

Many companies a small fraction of Walmart’s size have opened similar corporate outposts in order to access important talent clusters in their industries. Such offices can serve a range of functions. Some simply house a small team that listens to what’s going on locally and scouts out business development opportunities. Some establish an innovation lab like Walmart’s that works on new technology development. At others, companies focus on corporate venturing—partly to make a financial return on investments, but more to have a better vantage point on new advances.

Follow the Money

Where are the global talent hot spots? Data on venture capital investment and unicorn start-ups (those with billion-dollar evaluations) point to these locations:

Metro areas with the greatest VC investment (since 2009)

San Francisco

Beijing

Shanghai

New York

Boston

Los Angeles

London

Shenzhen

San Diego

Seattle

Source: Calculations from Thomson One data on venture capital funding

Metro areas with the most unicorns (since 2009)

San Francisco

Beijing

New York

Los Angeles

Shanghai

Boston

London

Seattle

Hangzhou

Chicago

Source: Calculations from CB Insights data

Companies benefit most from innovation when they acquire the best ideas, not when their average ideas are better. A physical presence in leading clusters helps companies connect with the most powerful concepts emerging in their sector. Corporate outposts are relatively inexpensive to launch, at least compared with HQ moves, and some companies effectively buy one by acquiring a young tech start-up. An important step in the launch of Walmart Labs, for instance, was the retail giant’s purchase of Kosmix in 2011.

Companies often want a presence in two or more clusters. One never knows where the next top idea will emerge, and firms can compete for talent better when they touch multiple clusters at once. Microsoft Research, for example, has built a network of labs outside Redmond, Washington, in locations that include Cambridge, Massachusetts; Cambridge, England; New York; Montreal; Beijing; and Bangalore. The Chinese white-goods giant Haier has five R&D centers—within and outside top clusters in the United States, Europe, Japan, Australia, and China—which are helping it stake out a role in the internet of things.

One of the major risks with outposts is being “penny-wise and pound-foolish” when selecting real estate. Location matters even within cities. The costs of locating close to Sand Hill Road or Market Street are substantially higher than elsewhere in the San Francisco area—but so are the benefits. A study of advertising agencies in Manhattan is illustrative. Manhattan’s agencies create about a quarter of all advertising in the United States. They rely on personal networking to share project work, splitting larger jobs into parts that can be independently attacked by each firm. However, the study found that sharing declines rapidly with geographical distance, disappearing entirely when two firms are more than half a mile apart. To successfully tap into the market, an ad agency requires not only a New York address but an address within a few city blocks of Madison Avenue.

The good news is that real estate vendors that make it less costly for companies to launch outposts are emerging. The coworking company CIC, for example, located in the heart of Kendall Square in Cambridge, Massachusetts, offers high-end, flexible office space on a month-to-month basis. CIC has created packages suitable for the innovation outposts of large companies, and its clients have included Amazon, Bayer, PwC, and Royal Dutch Shell. CIC even houses a “Captains of Innovation” program that links corporations to local innovators.

An advantage of outposts is that companies can experiment and start with a small team—keeping the option open for investment down the road. Five years before announcing its move to Boston, GE launched an outpost in Silicon Valley to accelerate its digital innovation efforts. The one-person office initially housed just Bill Ruh, an executive recruited from Cisco to lead a new lab. Over the next three years, he grew the office to 150 people, hiring Silicon Valley talent almost exclusively. The launch strategy kept initial needs small and allowed Ruh to shape the effort to Silicon Valley’s practices rather than being restricted by GE’s typical playbook. His group would grow to 1,800 employees and ultimately become its own business unit, now branded GE Digital.

If outposts aren’t working out, they can be closed, but this reversibility carries its own risk. Companies often pull the plug too quickly, believing an operation is failing because they have unrealistic expectations about how quickly they’ll see results. Leaders must understand that it takes time to build relationships; three to six months is rarely sufficient. What makes talent clusters special is an enormous volume and diversity of activity. The investment in start-ups housed within CIC’s coworking space alone exceeds the venture investment made in most U.S. states, for instance. There is much to learn before a new outpost can be effective, and discovery processes take time. This is especially true when organizations invest in a cluster far from home.

Another risk is that small teams away from the corporate center will be viewed as impotent, rendering outpost executives less interesting to local entrepreneurs and innovators. Empowering the local staff to make modest deals on behalf of the company goes a long way toward boosting the stature of an outpost’s leaders at the watercooler.

Perhaps most critical is the choice of initial outpost directors. These executives lend their personal credibility both internally to the corporation and externally to the cluster. One approach is to seek a “best of both worlds” launch team by combining a relocating executive from the parent’s HQ with a star already working in the cluster. When a foreign company enters the United States, this local talent is often an ex-pat of the same nationality as the parent organization.

A final risk with innovation outposts is that the best ideas and innovations will not flow back to the parent company effectively. Studies of patent data show that poor internal transfer is especially pronounced in cross-border settings. This may explain why many firms are disappointed with the returns from overseas innovation work—if the right conditions aren’t set, the output tends to be isolated.

One effective countermeasure is to promote international knowledge transfer by distributing collaborative teams across locations. That way, a company’s innovations are more likely to build on the patents filed in several locations. This approach is used extensively when companies first open new international facilities, either as a deliberate hedge to protect intellectual property or simply as a needed prop for the fledgling operations. Cross-border collaborative teams now account for 13% of the patents of large U.S. companies, up from just 1% in 1975. Though these global teams need to be carefully managed (see Tsedal Neeley’s HBR article “Global Teams That Work,” October 2015), they’re likely to grow in importance as companies seek more access to talent clusters.

Option #3: Executive Retreats and Immersions

Executive visits to top talent clusters can be a cost-effective way to increase awareness and excitement about efforts to accelerate innovation and reshape business models and management approaches. Though a weeklong trip rarely provides the missing piece to a company’s innovation puzzle, it can help executives build a grounded understanding of what’s happening at the frontier and how their companies may need to react.

In 2014 executives at the large European bank ING Netherlands felt that their organization, while profitable and seemingly stable, was not realizing its full potential in a financial services sector that was rapidly being revolutionized. So they embarked on visits to Spotify, Google, Netflix, Zappos, and other innovative companies to explore new possibilities.

Those trips led the executives to reimagine ING Netherlands as a smaller, nimbler organization with a stronger customer focus. To fulfill that new vision, the company would adopt agile team methodology throughout the organization, reduce head count at its Dutch headquarters by 25%, and redesign its facilities to have open floor plans without offices (even for the CEO) in order to foster new team interactions. Every person at headquarters had to reapply for a job, and all positions would be quite different under the new system. The transformation went live in 2015. CEO Vincent van den Boogert has been very pleased with the gains ING Netherlands has made since then in product innovation, customer satisfaction, and digital talent acquisition.

The global telecom giant Vodafone has also made executive immersions part of its innovation strategy. The company is based in London, a premier talent cluster, but outgoing CEO Vittorio Colao strongly feels that Vodafone must tap into other clusters to stay on the cutting edge in communication technologies and other advanced technologies that affect firm operations. Every year the top 50 Vodafone executives take a weeklong trip to Silicon Valley together to broaden their perspectives. Many other companies organize similar visits to New York, London, Boston, Shanghai, and other clusters for their executives or board members. (I myself have organized corporate immersions in Boston, and this article draws on those experiences. None of the companies mentioned in this article have been my clients, however.)

But many firms underinvest in immersions, for two reasons: Executives view the trip as a semi-vacation or, at the other extreme, can’t extract themselves from e-mails about daily operations to the team back home. The CEO must emphasize immersions’ high price—especially the opportunity costs related to executive time—to all participants. Mandates from the CEO regarding prework for the trip will set the tone, and nothing keeps executives off their smartphones the way the CEO’s mindful eye and visible passion do. An all-in mentality for leaders makes the immersion a success, and trips should be planned at times when that kind of dedication is realistic for the executive team.

Starwood regularly moves its entire headquarters to emerging markets for a month.

A second risk is that participants in immersions won’t dig deep enough. Visits to local companies can be informative and inspiring, but not if they don’t get past preset professional tours. ING’s visit to Spotify became much more effective, for instance, when people at the Swedish music company began to relate the costs and challenges of adopting agile methodology, not just the benefits.

One (rare) route to deep immersion is to park the leadership team abroad for an extended time. To obtain insights on innovative technology and services in emerging regions, Starwood Hotels has moved its entire corporate headquarters from America to China, India, and the United Arab Emirates for monthlong immersions. With shorter trips, visiting companies need to organize tailored sessions with local experts (such as business leaders and university faculty members) to achieve greater learning.

Companies also must ensure that the insights gathered are acted on back home. A one-off immersion may deliver short-term change while it’s top of mind for executives, but its lessons may soon get crowded out by other priorities. Tying immersions to a regular strategy or leadership-building process is a good way to capture their benefits. Immersions that have clear links to important corporate work before and after the retreat will have the strongest power, and executives should spend time on the trip itself debating and applying insights.

Vodafone offers a good example of how to leverage an immersion’s insights back home. The company invites its top 250 employees to London for three-day training sessions on the advanced technologies its top 50 leaders have studied. This program—which includes exercises like building a rudimentary chatbot for ordering coffee—pushes familiarity with the technologies into the organization’s second tier of leadership. To spread the insights throughout its vast organization, the company incorporates the emerging technology trends it has identified into personalized learning programs on its digital Vodafone University platform. (Vodafone also pairs leaders with young “digital ninjas” to provide ongoing upward mentoring on emerging technology trends and applications.)

A final risk is that executives will bring the wrong insights home with them. Clusters excel when the local community buys into the same priorities and perspectives, such as the deep respect given in Silicon Valley to people who launch game-changing companies. But any tightly knit place can also suffer from groupthink. Silicon Valley’s “move fast and break things” ethos has arguably left many tech giants blind to a backlash on issues like privacy, data security, and surveillance. Executives participating in immersions may be dazzled by the wrong things, when they should be listening carefully and asking questions.

CONCLUSION

A striking feature of today’s business landscape is the growing concentration of innovation activity—and the exceptional talent associated with it—into a small number of geographic clusters. As new technologies continue to disrupt industries, the fate of corporations will increasingly be determined in these hot spots. By taking one or more of the approaches I’ve outlined here, companies can access the intelligence in these key locations and keep up with the fast pace of change.